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The role of workfare in striking a balance between incentives and insurance in the labour market

  • Torben M. Andersen
  • Michael Svarer

    ()

    (School of Economics and Management, University of Aarhus, Denmark)

Workfare policies are often introduced in labour market policies to improve the trade-off between incentives and insurance as an alternative to benefit reductions. Most of the debate on such policies has focussed on the direct effect of those participating in the scheme, and in particular the possible locking-in effect reducing job search. In a general equilibrium search framework, we show that the effects of workfare policies critically depend on the response of those not in the programme when they take into account that workfare is a condition for remaining eligible for unemployment benefits. This implies that unemployed not yet in workfare may search more for regular jobs, and employed may accept lower wages since the outside option becomes less attractive. Introduction of workfare policies into an unemployment insurance scheme is shown to contribute to a reduction in both open and total unemployment. It is also shown that the direct search effects of workfare policies are a poor indicator of the overall effect workfare policies have on labour market policies.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-05.

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Length: 33
Date of creation: 31 Mar 2008
Date of revision:
Handle: RePEc:aah:aarhec:2008-05
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Claus Thustrup Kreiner & Torben Tranas, 2005. "Optimal Workfare with Voluntary and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 459-474, 09.
  2. Chambers, Robert G., 1989. "Workfare or welfare?," Journal of Public Economics, Elsevier, vol. 40(1), pages 79-97, October.
  3. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  4. Holzner, Christian & Meier, Volker & Werding, Martin, 2010. "Workfare, monitoring, and efficiency wages," Munich Reprints in Economics 19396, University of Munich, Department of Economics.
  5. James Albrecht & Susan Vroman, 2001. "Equilibrium Search with Time-Varying Unemployment Benefits," CESifo Working Paper Series 487, CESifo Group Munich.
  6. Torben M. Andersen & Michael Svarer, 2007. "Flexicurity – labour market performance in Denmark," Economics Working Papers 2007-09, School of Economics and Management, University of Aarhus.
  7. Brett, Craig, 1998. "Who Should Be on Workfare? The Use of Work Requirements as Part of an Optimal Tax Mix," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 607-22, October.
  8. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics 2006:12, Stockholm University, Department of Economics.
  9. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  10. Peter Fredriksson & Bertil Holmlund, 2003. "Optimal Unemployment Insurance Design: Time Limits, Monitoring, or Workfare?," CESifo Working Paper Series 1019, CESifo Group Munich.
  11. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  12. Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
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